chapter 7: inflation

real income

income in constant dollars; nominal income adjusted for inflation

hyperinflation

inflation in excess of 200 percent, lasting at least one year

percent change in CPI equation

item weight x percentage change in price of item = percentage change in CPI

real GDP equation

real GDP = nominal GDP / GDP deflator x 100

real interest rate equation

real interest rate = nominal interest rate - anticipated rate of inflation

price stability

the absence of significant changes in the average price level; officially defined as a rate of inflation of less than 3 percent

nominal income

the amount of money income received in a given time period, measured in current dollars

inflation rate

the annual percentage rate of increase in the average price level

bracket creep

the movement of taxpayers into higher tax brackets (rates) as nominal incomes grow

real interest rate

the nominal interest rate minus the anticipated inflation rate

item weight

the percentage of total expenditure spent on a specific product; used to compute inflation indexes

relative price

the price of one good in comparison with the price of other goods

inflationary flashpoint

the rate of output at which the inflationary pressures intensity; the point on the AS curve where slope increases sharply

money illusion

the use of nominal dollars rather than real dollars to guage changes in ones income or wealth

real GDP

the value of final output produced in a given period, adjusted for changing prices

nominal GDP

the value of final output produced in a given period, measured in the prices of that period (current prices)

base year

the year used for comparative analysis the basis for indexing; price changes

deflation

a decrease in the average level of prices of goods and services

GDP deflator

a price index that refers to all goods and services included in GDP

ARM

adjustable-rate mortgage; a mortgage (home loan) that adjusts the nominal interest rate to changing rates of inflation

inflation

an increase in the average level of prices of goods and services

core inflation rate

changes in the CPI, excluding food and energy prices

CPI

consumer price index; a measure (index) of changes in the average price of consumer goods and services

COLA

cost-of-living adjustments; automatic adjustments of nominal income to the rate of inflation